Let's go through Tesla's Q4 earnings report, and try and infer what is
actually happening here by interpreting what the numbers are really telling us,
and see what we can establish what is going on in the company.
Firstly, Tesla's auto revenue was half a billion higher than I expected. This implies that Tesla
has a higher average selling price than I initially thought. This would be due to the
price rises we have started seeing earlier last year, and more model s and x sales at
a higher price point. With an ASP of over $50,000. For comparison this was around a
4% increase in average price from Q3. This is particularly impressive also,
given that a lot of the increase in deliveries for the quarter can be attributed to the ramping up
we saw in Shanghai, particularly with the Model Y standard range, which is a lower price model.
Despite the average price increase, Tesla's margin only rose 0.1% to 30.6%. I was hoping
to see this higher, around 32%. I think that Tesla are actually having to pay higher
for certain parts due to supply chain constraints, possibly they are paying more chips to make sure
they can secure a higher supply. Then there is likely also some real inflation involved too.
And Tesla say they are experiencing rising raw material, commodity, logistics and expedite costs.
Yet saying that in the earnings report it stated that they saw
a further cost per vehicle reduction. The Model X was being ramped up this quarter too,
when the Model S was being ramped it did affect margins,
although I believe they use the same production line, so it's possible this may not be the case.
Anyway, in a sense all margin at this stage is moot. These low margin (for lack of better word)
cars being made at these existing factories, their capacity will soon be pale in comparison compared
to what the newer factories will produce. It's the cars from these factories that really matter. The
margin that they will produce. Likely somewhere between 45-55% easily that with FSD. That's the
margin that actually matters. The margin that Tesla are potentially capable of reaching,
not what they are doing now, particularly when we are aiming for 20 times as much production as
this. The margin Tesla generate now just affects short term stock prices, not long term growth.
Energy revenue was down a little this quarter and was actually a gross loss,
it had been breaking even previously. Services is up slightly, with a slight loss as usual.
Nothing much to expect from these sides of the business for sometime.
And the auto revenue is just going to tower of them for sometime.
So far no major surprises, all within what we might have expected. Now we get to OPEX. R & D
is up a bit, quite possible more 4680 development, and maybe some LFP research perhaps too.
It doesn't sound like much of this is going into the compact model or other new models,
so likely mainly battery technology.
But the real surprise was selling, general and admin up so high. We had S, G and A up to one
and a half billion, that's a 50% increase from last quarter. However, this was explained that
it was comprised of stock based compensation, and payroll tax associated with the exercise of
the 2012 CEO options, the total cost was over $700 million. This is more a one off expense,
and not reflective of the success of the company. There was also reasonably large recall
cost that Tesla had to face this quarter, which hopefully shouldn't be a regular expense either.
This was really the main thing that I don't believe anyone expected,
and caught us off guard. The rest was fairly close to what I had
thought. There isn't really much else to talk about there really.
Anyway, earnings came in at $2.3 billion. If we annualize that it comes to 9.2 billion.
At the time I am recording this, we have a stock price of $846,
and a market cap of $859 billion. This comes in at a p/e ratio of 90 based on that quarter.
The crazy thing is that this comes in at a trailing twelve month p/e ratio of 170.
Now I am of the belief that Tesla will show a quarterly earnings report sometime in 2024
that will show above $23 billion in earnings, i.e. 10 times this quarter. In other words
we are basing the value of this company at 90 years earnings,
and in 2 to 3 years earning could increase 10 times. That is a lot of growth.
Operating margins were down this quarter, but they would have increased, again, if it had not
been for these one off expenses. Like the $340M payroll tax on 2012 CEO award option exercise.
I calculate operating margins wold have been closer to 17.5% if it had not been for these.
Of course in the future when Tesla's revenue is up 5x, any minor fluctuations like these will
be relatively less noticeable. Just a reminder of just how small Tesla still is in its growth stage.
Again these margins will be significantly altered by the margins achieved from the
vehicles in the new factories. That will be a much bigger deal, of what Tesla can achieve,
rather than just what they are doing today. The more you think about it,
you more you think how little significance the current operations actually indicate.
Tesla are about to level up in a big way, despite how great this quarter actually was, we haven't
seen anything yet. We have 4680 batteries coming out this quarter. This is good news.
As for the share price, well it still sounds like there is blood out on the streets,
and maybe more to come. Tesla's trailing twelve month p/e is now down to 173. Comparing to if
we annualize Q4 profit then we have a p/e ratio of 90, about half the trailing twelve month p/e.
But we are seeing a forward p/e of 100. How can Tesla have a forward p/e
worse than the equivalent p/e for Q4? Tesla's actual forward p/e right now
has got to be closer to 40. If by Q4 2022 Tesla are at about twice the run rate they were at
in Q4, 2021, i.e. around 600,000 deliveries for 2022 Q4. Then surely net profit would have
increased closer to 3 or 4 times. I will have my 2022 projections out sometime early next month.
Then soon after that my 2025 projections. I mean that would mean in a years time we the
p/e down to 30 or so, for a trailing quarter p/e ratio, if the stock price remained where
it was at today. And this how I look things, I don't deviate too far from the fundamentals.
What I am saying is that at the current stock price, Tesla could easily have a p/e ratio of
around 30, as early as this time next year. For a p/e ratio solely related to that quarter,
i.e. not a trailing twelve month. Which is more relevant when a company is growing at this rate.
For Tesla to have a p/e ratio that low at a stage so early on that they aren't even selling cars
with their own batteries yet, to me, it seems like a good investment. I am not suggesting to buy it,
I am just helping you put it into perspective, we never know what will happen, it could drop
even further. These are uncertain times. But despite how strong the macro effect can be,
within a couple of years, the micro effect inside Tesla will outweigh any potential down economy.
Let alone 5 or 10 years time. The only issue is to make sure you can
cover yourself in a down economy, without having to resort to selling your shares.
The Warren Buffet phrase comes to mind
"Only when the tide goes out do you discover who’s been swimming naked".
Make sure you haven't over stretched yourself and aren't at risk of losing you house
or having to sell shares. Some of you are possibly even going one step further and waiting
for such an occasion to buy up big, if one ever arrives. This is known as contrarian investing.
Tesla is still very much a growth company, as we know, and they haven't even started making
their own batteries yet, well not selling them in the cars yet at least. It's a growth company
that has barely gotten started, and has a lot of orders to fill. Tesla has a long way to go,
however due to exponentials, even the growth over the next 2 years alone will be a huge improvement.
I think the macros have changed the environment somewhat, and currently the market is giving
lower p/e ratios. This may be the way things continue, and we just have to accept there has
been a market re-adjustment, and hopefully not a crash. But factoring Tesla's potential growth,
relative to the current p/e ratios, Tesla does seem good
value. And I have put my money where my mouth is, and had the confidence to buy a LEAPS.
Now back to that $700 million in S, G and A, if this was a one off payment,
that we wouldn't expect in other financials, then what if we removed that? I don't think
we can remove all of it entirely, so let's be somewhat conservative here,
and scale it back to $500 million, to see what effect this actually would have.
This is just for indicative purposes, we know this figure should be around $500 million, thus
reducing s,g and a to an even $1 billion. Bear in mind, this was a very high R & D quarter too,
there is possibly an additional $100 million that is not usually spent.
In fact I think this may be the most Tesla have ever spent on R & D in a quarter.
I am not sure if this is a sign of things to come, and Tesla will be spending more on R & D
now, and this is a thing to come. Perhaps with new battery technologies, or maybe advances with
the humanoid robot. Tesla are known for very efficient spending when it comes to R & D.
Therefore anything spent here, will within time produce brilliant returns.
Without that $500 million in S, G and A though we reach over $2.8 billion.
Which is a trailing quarter p/e ratio of just 75. Tesla will double deliveries this year,
with vehicles that have about 50% higher margin than before. Whilst OPEX will remain relatively
low. Tesla should at least triple their earnings this time next year, but possibly even 4 times.
Just at a quick guess, I think Q4 2022 could have in excess of $10 billion in
earnings. Even with a ludicrous p/e of 50 on that and we have a $2,000 stock price.
All in all I think the financials were better than I expected, I just thought auto margin would have
been slightly higher, but perhaps Tesla are having to spend more on chips. It is still
a great a margin, and at least Tesla have shown they have been able sustain such a high margin,
and it wasn't a one off. It was good to see the average selling price increase,
and I suspect we will continue to see that for sometime,
as we have other price increases catching up, along with Texas and Berlin vehicles.
Like I said there weren't really many surprises in the earnings report.
Of course we all follow this thoroughly and try to examine what it will all be
before hand anyway. The better job we do, the less surprised we should be.
I thought the earnings call was far more interesting,
and I will be discussing that at length.